The economist has a great article on the Icelandic debt woes. It outlines the possibility of a future flood of government and international defaults.

My analysis of this is that the investors took the risk in this case. The “savers” in this case should have exercised more caution in picking their accounts. A higher rate of return should be assumed to come with a higher rate of risk or volatility. My suggestion?

Consider any investment/savings in a foreign country with “high returns” to be a risky investment, even if it is a “savings” account.

Never use a savings account without a Government or Government corporation (ie FDIC) guarantee. In the case of Icesave, even the savings insurance plan failed investors and savers.

Below are some links that illustrate how much we underestimate endemic risk.

An investor or saver reading one of the above articles might think they were secured by a government guarantee. However the Economist article clarifies in the text I copied below.

“Landsbanki’s products were not covered by the domestic deposit-insurance schemes of the target countries. Under a passport system covering the European Economic Area (a broader, watered-down version of the European Union), investors were supposedly covered by the Icelandic deposit-insurance scheme.”

Clearly now that the European countries paid back their savers and they now want to money from Iceland. Now a vote will decide the issue. I think there is serious confusion on how savers are protected domestically and internationally. Clearly there is confusion and misinformation about international savings. Governments need to better inform, outline and legislate how transnational investments are covered under Deposit Insurance plans.

My advice to savers? Find a good domestic Credit Union or established bank.

The NYT has a great piece on American debt levels. This picture should be a flashing red warning light to anybody. Debt can be a useful tool in buying a home, or car. However there is clearly not enough saving by Americans. When credit is in high demand or short supply, interest rates go up. So when individuals, business, and governments all seek credit, it drives up interest rates. However one might note that US real interest rates are extremely low. The world economy is an open system and when other nations save it allows the United States to keep interest rates low by borrowing internationally.

This chart puts the increasing US Debt levels into perspective. The chart shows the falling US historic capital formation. Investment is extremely cyclical. Companies typically don’t make huge investments when cash and credit are in short supply. Greg Mankiw also has a great article on economic investment.

The WJS has a great piece I quoted below on this subject. Mr Varian is the chief economist at Google as well. His article scores the need for private investment.

“Unfortunately, savings are currently not getting translated into investment for three reasons. First, one of the largest categories of physical capital is real estate, and we have already overinvested in that area. Second, businesses are reluctant to invest in new plant and equipment due to the weakening economy. Third, the sorry condition of bank balance sheets has made them reluctant to lend. The net result is that money is piling up in ultrasafe assets like Treasury bills, without being invested in ways that would build a more productive economy.”

Clearly there is a need for more long term investment in the US economy. This is where the government needs to promote infrastructure spending by businesses and states. Encouraging them to do that is the tricky part.

Creditor-Debtor tip #2:

Learn your states debt statutes. What does that mean to you? If you don’t not make payment on an old unsecured debt for X years, the debt is often NOT COLLECTABLE. Of course this does not apply to many forms of debt like Student loans and mortgages. Each states has its own set of rules for how long creditors can collect old debts. So each payment you make can establish the debt as valid for another X number of years. As always make sure you consult with a lawyer regarding legal matters.